The Federal Trade Commission's Premerger Notification Office
has expanded the Hart-Scott-Rodino (HSR) reporting requirements for
certain leveraged buyouts. M&A practitioners generally are
familiar with the HSR premerger notification regime. Most are also
familiar with the fact that determining whether a transaction is or
is not subject to reporting is not always straightforward. The HSR
reporting rules require that before certain transactions can close,
typically M&A deals but other types of transactions can be
captured as well, the antitrust enforcement agencies – FTC
and DOJ – must be notified and a 30 day waiting period must
be observed. In transactions likely to result in competitive harm,
the agencies can investigate, which can further delay closing. In
the most extreme cases the agencies can impose restrictions, order
divestitures, or block a transaction from closing altogether.
Therefore, any expansion in reporting requirements merits close
The basic threshold for reporting under the HSR Act, known as
the "Size-of-Transaction", presently is $78.2 million,
and adjusts annually. Size-of-Transaction is a bit of a misnomer
though because as calculated under the HSR rules it does not always
also reflect the transaction value the parties have agreed. It also
can include the value of certain prior acquisitions. The rules
provide that asset acquisitions include the value of prior asset
acquisitions from the same seller in the prior six months, and that
asset acquisitions also include the value of assumed liabilities.
Prior acquisitions of stock, on the other hand, are always
aggregated with new acquisitions of stock in the same company for
determining the Size-of-Transaction, but valuing the stock in those
transactions can be tricky. The value of stock previously held, for
instance, is based on the current value of the stock at the time of
the new acquisition rather than its original acquisition price.
In stock acquisitions, existing debt is not included in the
Size-of-Transaction analysis, and this is true whether the existing
debt is being paid off at closing or is being refinanced. The rule
aims to align reportability in this context with the equity value
of the company rather than its full enterprise value.
The agency recently reversed its position though with respect to
Leveraged Buy-Out, or LBO, transactions where new debt is
taken on to finance the transaction. Prior guidance tied
reportability in the LBO context to which party incurred the new
debt. Where the buyer incurred the debt, it was included in the
Size-of-Transaction calculation, and where the target incurred the
debt, it was not. Under the new guidance, however, the agency has
squarely reversed its position -- "new debt used to finance an
LBO transaction, whether taken on by the buyer or the target, is to
be included in the size of transaction".
Thus, the Size-of-Transaction for stock deals under the new
guidance will most closely align with the pre-transaction equity
value of the company, rather than the company's post-closing
equity value. The change will mean more transactions will be
subject to HSR reporting, particularly in the private equity arena
where debt financing is common.
As the new guidance is effective immediately, it will also mean
transactions presently underway that would not have been subject to
reporting under the prior guidance will now need to be reevaluated
– potentially resulting in additional costs and delaying
closing. If you are involved in an LBO transaction that has not yet
closed and that was exempt from HSR reporting under the prior
agency interpretations, please feel free to contact one of our
attorneys listed below to discuss how the new guidance will impact
On January 31, 2017, President Trump announced the nomination of
Tenth Circuit Judge Neil Gorsuch to fill Justice Antonin
Scalia's former seat on the US Supreme Court. This Advisory
reviews Judge Gorsuch's approach to antitrust issues as
reflected in his opinions.
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